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Are cryptocurrencies considered assets?

Are cryptocurrencies considered assets?
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    What is cryptocurrency?

    Cryptocurrency is a currency that exists virtually, in other words, digitally, and a cryptographic system underpins it to secure its transactions. Some of the foremost popular cryptocurrencies you might know are Bitcoin, Ethereum, Tether, and Binance coin.

    We store cryptocurrency in an e-wallet, a software-based system to securely store the payment information and passwords of its users.

    Rather than being a type of physical currency exchanged worldwide, cryptocurrency transactions exist digitally in an online platform defining the specific transaction and recording it in a public ledger.

    It uses a decentralised system to issue new currency units and report its transactions. There is neither government control nor a regulatory authority. 

    As cryptocurrency is a digital currency, you cannot possess it as a tangible good. All you own is a key that enables you to securely move a unit of currency or else record a transaction digitally from one individual to another individual without using third-party intermediaries. 

    Is cryptocurrency a financial asset?

    Though they introduced cryptocurrency in 2009, it did not have a proper definition until recently. It is an investment to some people and to others, it is a commodity or property.

    With the right cryptocurrency accountant, you can feel confident about your taxes and get more of your money back in return.

    Thus, IFRIC (International Financial Reporting Standards Interpretations Committee) concluded by analysing what cryptocurrency is and how holding a cryptocurrency should be accounted for.

    As the definition of cryptocurrency is chaotic, and plenty of cryptocurrency types exist, the first step of IFRIC was defining cryptocurrency.

    As per the IFRIC analysis, the key characteristics of cryptocurrency have been defined as follows:

    ● A digital currency that is recorded on a public ledger that uses cryptography for security.

    ● It would not give rise to a contract between the holder and another party.

    ● Not issued by a jurisdictional authority or another party.

    Accordingly, IFRIC identifies cryptocurrencies as crypto-assets with all the above characteristics. 

    According to IFRS 9: 

    Financial Instruments, digital currencies can be considered as financial assets. But, when considering the characteristics of cryptocurrency, it doesn’t meet the requirements of a financial asset.

    Further, regarding IAS 32: Financial Instruments, when something is considered to be a financial asset, it should be something that contains the factors listed below:

    • Cash is an equity instrument of another entity.
    • It is a contractual right to receive cash or another financial asset from another entity.
    • You will find a contractual right to exchange financial assets or financial liabilities with another entity under particular conditions, or
    • There is a particular contract that will or may be settled in the entity’s own equity instruments.

    Thus, if cryptocurrency meets all those requirements, then it can be considered a financial asset.

    Although cryptocurrency seems to be a financial asset at a glance, none of the above requirements of a financial asset have been met by cryptocurrency, and so IFRIC came up with a decision concluding that the holding of cryptocurrencies cannot be considered as a financial asset.

    Why can’t we consider cryptocurrency as cash? 

    IFRIC also considered whether cryptocurrency can be considered as cash, focusing on the definition of cash in IAS 32. According to IAS 32, cash is something that can be used as a medium of exchange and also, it should be a monetary unit in pricing goods and services as well as it would be the basis of all transactions that are measured and recognised in financial statements.

    Though people can use some cryptocurrencies to exchange for specific goods and services, you will find no cryptocurrency that is used as a medium of exchange that is aware.

    And also, cryptocurrency should be a monetary unit in pricing goods and services to the point where it is used to measure and account for all transactions in financial statements in order to be considered cash.

    Further, cryptocurrency is not issued by a jurisdictional authority such as a government or other legal entity.

    Therefore, regarding the above definition of IAS 32, IFRIC came to the conclusion that cryptocurrency cannot be considered cash since it does not have the relevant requirements of cash.

    Since cryptocurrency is not a financial asset, what could it be from the accounting perspective?

    Let’s take a look at that.

    Though cryptocurrency is not considered a financial asset, since cryptocurrencies do not have physical substance, it meets the relevant requirements of the definition of an intangible asset.

    Therefore, according to the characteristics of an intangible asset under IAS 38: Intangible Assets, the committee concluded that cryptocurrency meets the relevant requirements of intangible assets if an entity “holds it for sale in the ordinary course of business”.

    Those characteristics of intangible assets are:

    • It should be identifiable. That means It is able to be separated from the holder and can be transferred or sold individually or together. And also, it stems from contractual rights, whether that right is transferable or separable from the entity.
    • Cryptocurrency can be separated from the holder to transfer individually
    • Cryptocurrency does not have a fixed value. As well as the value of cryptocurrency depends on the supply and demand, and it is impossible to predict, it should be considered as an intangible asset. This means the people who hold cryptocurrencies can no longer apply IAS 8: Accounting Policies; IFRS 9: Financial Instruments, errors, and any of the estimation changes in accounting when accounting for cryptocurrency.

    Further, according to IAS 2, intangible assets can be defined as inventories if they have the following characteristics of the definition of inventory:

    • It is held for sale in the ordinary course of business.
    • It is in the process of production for such a sale.
    • It is in the form of materials or supplies to be consumed in the production process or in the rendering of services.

    Regarding the above characteristics under IAS 2, IFRIC states that an organisation may hold cryptocurrency with the intention to sell in the ordinary course of business. This means if there is a kind of situation where organisations using cryptocurrency as a medium of exchange can be classified as inventories under IAS 2: Inventories. 

    FAQs

    Can cryptocurrency be considered a financial asset?

    According to IAS 32: Financial Instrumentsthe following characteristics must be present for something to be considered a financial asset:

    • Cash – though some organisations accept cryptocurrency as a payment method, it is not a widely accepted medium of exchange. Also, it does not represent legal tender. If cryptocurrency is cash, it should be easily exchanged for any goods and services. 
    • An equity instrument of another entity– cryptocurrency does not act as an ownership interest in a certain entity. Therefore it is not an equity instrument.
    • A contractual right to receive cash or another financial asset from another entity.
    • A contractual right to exchange financial assets or financial liabilities with another entity under particular conditions, or
    • A particular contract that will or may be settled in the entity’s own equity instruments.

    Hence, cryptocurrency cannot be considered a financial asset since it does not have a contractual right to receive cash or another financial instrument from an entity or it does not represent cash, an equity instrument. 

    Can cryptocurrency be considered as cash or cash equivalent?

    According to the definition of IAS 32 and IAS 7, cash is a medium of exchange which is widely accepted and also, it can be easily exchanged for goods and services.

    Though some organisations accept cryptocurrency as a payment method, it is not a widely accepted medium of exchange.

    Also, it does not represent legal tender. Cryptocurrency should be easily exchanged for any goods and services if it is considered cash.

    When it comes to cash equivalents, it should be a short-term as well as a high-liquidity investment which can be converted to a definite amount of cash. And also, it should be subject to an insignificant risk of value changes according to IAS 7.

    But cryptocurrency is subject to significant price fluctuation. Therefore, cryptocurrency cannot be considered as a cash equivalent.

    If cryptocurrency is not cash, then what it would be?

    Since cryptocurrencies do not have physical substance, they meet the relevant requirements of the definition of an intangible asset.

    Therefore, according to the characteristics of an intangible asset under IAS 38:

    Intangible Assets, cryptocurrency meets the relevant requirements of intangible assets if an entity “holds it for sale in the ordinary course of business”.

    Those characteristics of intangible assets are as follows:

    • It should be identifiable. That means it is able to be separated from the holder and can be transferred or sold individually or together. And also, it stems from contractual rights whether that right is transferable or separable from the entity.

    Can cryptocurrency be considered to be a personal use asset?          

    Most people use cryptocurrency to earn profits through income or else through capital growth. Personal use assets, in the sense of assets that are subject to Capital Gains Tax (CTG) and which are generally kept for personal usage.

    Cryptocurrency cannot be considered a personal use asset if people keep it:

    • As an investment.
    • During the course of running a business, or else, 
    • When it comes to a profit-making scheme.

    The time to determine if an asset is a personal use asset is when it is disposed of.

    The issue is, that the way people keep cryptocurrency may change gradually. Even though someone’s ultimate intention is to use cryptocurrency for personal use, it is not likely to be a personal use asset if it is held longer.

    That means if someone’s intention is to keep cryptocurrency for personal use but eventually they use it as an investment to earn profits or keep it during the course of running a business.

    What’s a crypto asset?

    Assets that exist digitally in an online platform that defines the specific transaction and records it in a public ledger are known as crypto assets. Crypto is underpinned by a cryptographic system and uses peer-to-peer networks and distributed ledger technology to secure its transactions and passwords.

    Blockchain is one of the types of ledger technology. Crypto assets operate by using a decentralised system which means that there is no government or regulatory authority to control them.

    People use crypto assets for a variety of purposes, such as using them as a medium of exchange, for business purposes, or as a means of storing value.

    Cryptocurrency is arguably the most well-known type of crypto assets, and security tokens, utility tokens and non-fungible tokens can be thought of as common types of crypto assets.

    If you’d like to learn more about cryptocurrencies or would like help with your crypto taxes, contact us at WIS Accountancy, we’d love to help you.

     

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